When Economics Meets Hierarchy: A Field Experiment on the Workings of the Invisible Hand

Seminal work within experimental economics has shown the remarkable tendency for experimental trading markets to converge to neoclassical predictions. Yet, the extent to which neoclassical competitive market theory explains the equilibrating forces operating in extra-lab markets remains under-researched. In this study, we depart from the traditional experimental investigation of neoclassical competitive theory by using the tools of experimental economics in an actual marketplace. Our laboratory mimics a market in rural Sierra Leone, a region characterized by low levels of market integration and high levels of personalized trade. When participants interact with co-villagers, efficiency levels are much lower than found in the extant literature. By introducing treatments that increase anonymity between traders, we show that social hierarchies play a significant role in dampening efficiency. High-status individuals, when trading with their co-villagers, reduce overall efficiency by paying too much for items traded in the experiment. Upon eliminating statusrelated concerns, we find that overall efficiency levels approach those found in previous studies.